The New York Times has published a very negative article on donor advised funds (DAFs) in today’s business section. The headline characterizes DAFs as a “philanthropic loophole” that “tech billionaires” use to “hack their taxes.” The article goes on to describe DAFs as “a sort of charitable checking account with serious tax benefits and little or no accountability.” The most withering criticism of DAFs comes from the University of Southern California’s Ed Kleinbard (with whom I agree on most other tax policy questions). DAFs are “a fraud on the American taxpayer,” the article quotes Kleinbard as saying. “They’re a way for the affluent to have their cake and eat it, too.”

The remarkable rise of DAFs poses a number of interesting policy questions. But I think these questions are a lot more complicated than the Times article lets on. DAFs can serve socially useful functions, such as facilitating stock contributions to smaller 501(c)(3)s, encouraging donors to be more reflective in their philanthropic decisions, and extending the tax incentive for charitable giving beyond the very rich. It’s worth thinking about those benefits before concluding that DAFs are a “fraud.” ...

Is this having your cake and eating it too? Well, it’s really more like refrigerating your slice of cake and giving it away later. You can’t withdraw the money and use it yourself. The IRS won’t allow that, and Fidelity Charitable is not going to jeopardize the tax-exempt status of its $21 billion fund by letting you use its DAF like an ATM. ...

I don’t want to portray DAFs as a philanthropic utopia. Fees are probably too high at most DAFs, though fierce competition among Fidelity, Schwab, and Vanguard has gone some way toward pushing expenses down. Silicon Valley Community Foundation, one of the largest DAFs, faces serious allegations that it allowed an abusive workplace culture to take root (ultimately resulting in the recent resignation of its CEO). But of all the tax “loopholes” to getangryabout, I would rank this one quite low on my list.

Comments

DAFs allow high-income earners to create a charitable contribution war chest during their high tax rate earning years to dribble out during low tax rate retirement years. Thus it is a form of income-averaging, which is not at all abusive. My Schwab folks are very fastidious in ensuring any request I make is fully compliant (e.g., no sponsorship that includes dinner) before considering my request. Whether DAFs are good tax policy or not turns more on the extent to which one wants to encourage charitable deductions. And yes, they certainly increase contributions of appreciated securities, but the tax policy merit of that rule must be evaluated independently.